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Dear sir in the lecture video when you mentioned using cashflows before interest inorder to calculate free cashflow to the firm,
1. does this mean it is the cashflow available to everyone, debt lenders and shareholders.
2. However you also mentioned that the cost of capital takes account of the interest portion. wouldn’t that strip away the interest from the cashflows leaving with just cashflows to equity holder and the present value should be market value to equity holders.
Please help me uderstand why even after the discounting(striping away the interest) the cashflows still would remain cashflow to all provider of finance. Thanks1. Yes. The cash flow to the firm is the cash available to pay all investors – equity and debt lenders.
2 The cash (before subtracting the interest) is the total available in total for all investors regardless of how the company is financed. If the company was entirely equity financed that that would be the amount available for shareholders. If it is debt financed that some of that amount would be going to debt lenders and the rest available for shareholders. However it is financed it is the total available for all investors. We then discount the total available by the WACC which is the overall cost of finance to get the total value of the firm (again, equity plus debt).
why would someone want to know the market value of the company oppose to the market value of equity. what would be the benefit for each sir
It is not a question of there being benefits of either.
If someone is buying the whole company (including the debt) then they will be interested in the value of the whole company. If they were buying only the shares then they will be interested in the value just of the equity.
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